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Why Zillow Group Stock Surged Another 25% in August

By Andrew Tseng – Updated Sep 7, 2020 at 9:42AM

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The company's second quarter crushed expectations.

Shares of Zillow Group (Z -4.87%) (ZG -4.74%) soared 25.2% in August, according to data from S&P Global Market Intelligence.

That move sent the stock of the online real estate market from $68 per share to $85 during the month. This comes on the heels of the stock's 26% jump in the first half of 2020 and further 5.4% gain in July. At the end of August, Zillow Group shares were up 86% for the year.

What happened

The big news during August was Zillow's exceptionally strong second-quarter earnings report. The company's revenue was strong across all three segments: the core internet, media, and technology ("IMT") segment; the homes segment, which is the Zillow Offers iBuying business; and the mortgages segment.

Zillow's Premier Agent business, which is the bulk of the IMT segment, saw its revenue fall 17% year over year, which was far better than the 27% decline management had previously told investors to expect.

A couple looks at a home buying app on a tablet.

Image source: Getty Images.

And management expects 15% year-over-year Premier Agent revenue growth in the third quarter. That swift return to growth should come from continued increases in site traffic as U.S. residential real estate activity keeps rebounding, improving connection rates between Zillow homebuyer leads and real estate agents, and the expiration of the discounts Zillow provided to agents during the uncertainty of March and April.

The homes segment reported stellar revenue growth of 82% due to the rapid selling of the company's home inventory. And the mortgages unit grew revenue 25% year over year.

So what

Given the impressive revenue growth across all three segments along with cost-cutting implemented in March, profit margins improved meaningfully year over year.

The strong pace of home sales for Zillow Offers helped generate lots of cash during the quarter, but it also left the business with only 440 owned homes. That's down from a high of 2,822 homes owned at the end of the third quarter of 2018. As a result of the now-depleted home inventory level, management told investors to expect homes segment revenue to decline 61% year over year in the third quarter since there are so few homes on hand to sell.

Now what

Zillow's core business is clearly surging and may be stronger than ever. At the same time, the Zillow Offers business will take time to bounce back to the scale it had before COVID-19. Investors should be patient with the latter business while it recovers.

Andrew Tseng owns shares of Zillow Group (A shares). The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zillow Group (A shares) Stock Quote
Zillow Group (A shares)
$29.16 (-4.74%) $-1.45
Zillow Group (C shares) Stock Quote
Zillow Group (C shares)
$29.02 (-4.87%) $-1.49

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